Romney the Marauder, and Bankruptcy as a Means to Success

Michael Barbaro's examination of Mitt Romney's business record for The New York Times is focused on his deal, while the head of Bain Capital, to take over an Illinois medical equipment company called Dade International in 1994.

It is a telling example of Romney's modus operandi. Bain led an investor group (Goldman Sachs had a piece of the action too) that bought the company with borrowed money, ran it for several years while imposing its management techniques — that is, maximizing payouts to investors, charging management fees, and laying off a lot of people — then sold the firm, just before it fell into (temporary) bankruptcy.

The outlines of a Democratic attack on this storyline are obvious: Romney the heartless businessman, taking over a functioning company, maximizing profits for him and his Boston banker buddies, laying off hard-working members of the middle class, and dropping the company like a hot rock when it could do no more for his firm. (Take a look at the way similar arguments were used last cycle against Carly Fiorina, the former Hewlett-Packard CEO who ran for Senate in California, and Tom Foley, who led a remarkably similar takeover deal on a Georgia textile mill, and ran for governor in Connecticut. They both lost.)

Still, there's a clear line for Romney and investment bankers to take too: this is how private equity is supposed to work. The company's former executives say they worked with renewed urgency when Romney and Bain Capital got involved. The firm's value and assets ballooned. And while its cost-cutting was painful (one former employee attempted suicide, others moved from Puerto Rico to Florida, where they were fired and then told to pay back their moving costs to the company), Romney and Bain can defend their efforts with the convincing argument that preserving the status quo of a small-time medical device maker in Illinois wouldn't have prevented job losses in the long run.

The most interesting part of the story comes, though, at the very end. Bain Capital maximized its profits in part by orchestrating a buyout, by Dade, of half of its investment, using borrowed money. That meant $242 million for Bain, but an unsustainable level of debt for Dade, which went bankrupt. Romney by then was already ensconced in a new job, as the savior of the Salt Lake City Olympics.

But the bankruptcy wasn't permanent. The debts were cleared off — some threatened to sue Romney's former company for, in essence, wringing cash out of the business in a way that doomed it to fail — and Dade emerged as a growing, effective company. Siemens bought it, Barbaro writes, for $7 billion in 2007.

In hindsight, executives tell Barbaro they shouldn't have been so quick to strip cash from the company, since that seemed to hasten its collapse. But in the long run, they also see a success story. Here's that last line:

The bankruptcy “does muddy the story,” said Mr. Wolsey-Paige, the former Dade executive. “Over all,” he said, “it was very positive.”

In a way, he's right. The company sold for $7 billion! All that manipulation worked. But there's a striking tone-deafness here, in the difference between corporations and people (something Romney has already had to confront on the campaign trail). Does the middle-class family facing foreclosure or bankruptcy in Ohio get to consider such a step — the shedding of all that debt, a game-reset of good and bad financial decisions — as a muddy patch in the road? Not likely. Bankruptcy for those people (as opposed to corporations and investment firms) is a ruinous event. Devastating and very hard to recover from.

Maybe Romney thinks this is the way business acumen can beneficially inform government. When he proposes to allow foreclosures to "hit bottom," maybe he believes it will enable a Phoenician rebirth for upside-down homeowners and real estate investors. But it's doubtful that the dilemma now faced by millions of Americans will be as easy to leave behind as that medical device maker was for the bright-eyed men from Bain Capital.